<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: March 31, 1999
Commission file number: 33-24464-NY
IMTEK OFFICE SOLUTIONS, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE Tax ID #11-2958856
- --------------------------------------------------------------------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identifications No)
8003 Corporate Drive, Suite C, Baltimore, Maryland 21236
----------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (410) 931-2054
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
-------------------------------------------------------------------------------
Yes No X
State the number of shares outstanding of each of the issuer's classes of common
equity as the latest practicable date: 7,538,361 shares as of May 10, 1999.
<PAGE>
INDEX
IMTEK OFFICE SOLUTIONS, INC.
<TABLE>
<CAPTION>
<S> <C>
PART I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets - March 31, 1999
(unaudited) and June 30, 1998 (audited).......................................................... 3
Consolidated Statements of Income - Three months
and nine months ended March 31, 1999 and 1998.................................................... 5
Consolidated Statement of Shareholders Equity
for the nine months ended March 31, 1999......................................................... 6
Consolidated Statements of Cash Flows -
nine months ended March 31, 1999 and 1998........................................................ 7
Notes to Consolidated Financial Statements....................................................... 8
Item 2 Management's Discussion and Analysis of Results of
Operations and Financial Condition and Liquidity................................................. 11
PART II. Other Information
Item 1. Legal Proceedings................................................................................ 18
Item 6. Exhibits and reports on Form 8-K................................................................. 18
Signature........................................................................................ 19
Financial Data Schedule
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
-------------- -------------
(unaudited) (audited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 332,571 $ 2,949,168
Escrow deposit 2,544,350 5,054,220
Accounts receivable (net) 4,442,445 1,390,302
Other receivables 249,490 151,235
Inventory 3,464,710 1,641,309
Deferred tax assets 82,124 82,124
Prepaid expenses and other current assets 1,083,380 783,480
--------------- -----------
Total current assets 12,199,070 12,051,838
PROPERTY AND EQUIPMENT -
at cost,less accumulated depreciation and amortization 3,364,242 1,880,888
OTHER NONCURRENT ASSETS 335,988 497,516
DEFERRED FINANCING COSTS, less accumulated amortization 326,644 361,941
OTHER INTANGIBLE ASSETS, less accumlated amortization 6,025,894 1,732,574
--------------- -----------
$22,251,838 $16,524,757
--------------- -----------
--------------- -----------
</TABLE>
See notes to consolidated financial statements
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31, 1999 June 30, 1998
(unaudited) (audited)
------------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Note payable - bank $ 2,224,876 $ --
Current maturities of notes payable 590,000 560,055
Current maturities of obligations under capital lease 250,000 234,081
Accounts payable and accrued expenses 3,267,317 1,629,979
Accounts payable - related party 427,646 795,205
Customer escrow accounts 2,544,350 5,054,220
Deferred revenue 1,412,185 168,153
Income taxes payable 579,306 434,804
------------- -----------
Total current liabilities 11,295,680 8,876,497
NOTES PAYABLE, net of current maturities and original issue
discount 6,019,471 3,502,506
OBLIGATIONS UNDER CAPITAL LEASE, net of current maturities 648,371 988,578
DEFERRED TAX LIABILITY 65,490 65,490
PUT OPTION OBLIGATION 285,340 335,695
MINORITY INTEREST 143,424 --
STOCKHOLDERS' EQUITY
Preferred stock, $100 par value; authorized 75,000 shares;
liquidation preference of $674,000; issued and outstanding, 8,370
shares (6,740 shares at June 30, 1998) 837,000 674,000
Common stock, $.000001 par value; authorized 250,000,000 shares;
issued and outstanding 7,532366 shares in 1998 and 5,000,000
shares in 1997 8 8
Additional paid-in-capital 1,408,703 1,420,548
Retained earnings 1,548,351 661,435
------------- -----------
3,794,062 2,755,991
------------- -----------
$22,251,838 $16,524,757
------------- -----------
------------- -----------
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
------------- -----------------
March 31, 1999 March 31, 1998 March 31, 1999 March 31, 1998
(unaudited) (unaudited) (unaudited) (unaudited)
-------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
REVENUES
Equipment & Supplies $ 6,479,657 $2,026,529 $18,014,189 $ 4,867,602
Merchant Banking 11,437,390 7,912,213 35,535,143 12,889,107
Leasing - Net 41,343 -- 41,343 --
-------------- -------------- --------------- -------------
17,958,390 9,938,742 53,590,675 17,756,709
COST OF REVENUES
Equipment & Supplies 4,391,188 993,003 12,166,856 2,884,247
Merchant Banking 8,698,843 6,844,162 26,297,517 10,950,806
-------------- -------------- --------------- -------------
13,090,031 7,837,165 38,464,373 13,835,053
GROSS PROFIT 4,868,359 2,101,577 15,126,302 3,921,656
SELLING AND GENERAL EXPENSE 4,559,926 1,488,183 12,845,616 2,778,919
-------------- -------------- --------------- -------------
OPERATING INCOME 308,433 613,394 2,280,686 1,142,737
INTEREST EXPENSE 303,963 21,073 742,255 21,073
MISCELLANEOUS INCOME (35,854) -- (85,309) --
-------------- -------------- --------------- -------------
INCOME BEFORE INCOME TAXES AND
MINORITY INTEREST 40,324 592,321 1,623,740 1,121,664
MINORITY INTEREST 29,745 -- 143,424 --
INCOME TAXES 4,000 242,850 593,400 462,967
-------------- -------------- --------------- -------------
NET INCOME 6,579 349,471 866,916 658,697
Preferred Stock Dividends 18,832 -- 52,829 --
-------------- -------------- --------------- -------------
Income available to common
Stockholders $ (12,253) $ 349,471 834,087 $ 658,697
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
NET INCOME PER SHARE
-- $.05 .11 .10
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
Diluted -- $.05 .11 .10
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
WEIGHTED AVG. PER SHARE 7,532,366 7,538,361 7,532,366 6,903,746
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
Diluted 7,646,286 7,538,361 7,633,136 6,903,746
-------------- -------------- --------------- -------------
-------------- -------------- --------------- -------------
</TABLE>
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For the period from June 30, 1998 to March 31, 1999
<TABLE>
<CAPTION>
- -------------------- ---------------------------- ----------------------------- ------------- ------------- -------------
Preferred Stock Common Stock
- -------------------- ---------------------------- ----------------------------- ------------- ------------- -------------
Paid in Retained Stockholders
Shares Amount Shares Amount Capital Earnings Equity
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance -
June 30, 1998 6,740 $674,000 7,532,361 $8 $1,420,548 $ 661,435 $2,755,991
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
Issuance of
Preferred Stock 1,630 163,000 -- -- (11,845) -- 151,155
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
Net Income for the
period -- -- -- -- -- 886,916 886,916
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
Balance -
March 31, 1999 8,370 $837,000 7,532,361 $8 $1,408,703 $1,548,351 $3,794,062
- -------------------- ------------- -------------- -------------- -------------- ------------- ------------- -------------
</TABLE>
See notes to consolidated financial statements.
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<PAGE>
IMTEK OFFICE SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended March 31,
<TABLE>
1999 1998
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES $ 886,916 $ 658,697
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 523,297 49,269
Minority interest 143,424 --
Amortization of put option obligation (50,355) --
Changes in assets and liabilities
Accounts and other receivables (3,150,398) (1,633,311)
Inventory (1,823,401) (129,426)
Accounts payable and accrued expenses 1,269,779 1,016,567
Deferred revenue 1,244,032 51,212
Prepaid expenses (299,900) (373,485)
Other assets 161,528 (30,344)
Income taxes payable 144,502 554,729
--------------- ------------
Net cash (used) provided by operating activities (950,576) 163,908
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,714,354) (1,624,461)
Acquisition and intangibles (4,550,320) (255,140)
--------------- ------------
Net cash used in investing activities (6,264,674) (1,879,601)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable 5,182,839 2,177,916
Payments on notes payable (735,341) --
Issuance of preferred Stock - net 151,155 --
Change in paid in capital -- (29,112)
--------------- ------------
Net cash provided by financing activities 4,598,653 2,148,804
Net (decrease) increase in cash (2,616,597) 433,111
Cash at beginning of period 2,949,168 11,349
--------------- ------------
Cash at end of period $ 332,571 $ 444,460
--------------- ------------
--------------- ------------
DISCLOSURE OF CASH FLOW SUPPLEMENTAL INFORMATION
Cash paid for interest $ 742,255 $ 21,073
--------------- ------------
--------------- ------------
Cash paid for taxes $ 440,100 $ 20,400
--------------- ------------
--------------- ------------
</TABLE>
See notes to consolidated financial statements
-7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
IMTEK OFFICE SOLUTIONS, INC.
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statement follows:
NATURE OF BUSINESS
The Company is a regional supplier of equipment products and services
used by offices to manage information and documents. The Company also
provides a variety of specialty finance and merchant banking services,
primarily the purchase and sale of viaticated life insurance policies.
The Company conducts business in the Baltimore, Maryland, Washington,
DC, Richmond and Tidewater, Virginia, Atlanta, Georgia and
Philadelphia, Pennsylvania markets and grants credit to its customers
in those regions.
In July, 1998 the Company's Board of Directors and shareholders
approved a change in the fiscal-year-end from September 30th to
June 30th of each year, effective June 30, 1998.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements as of March 31,
1999, reflect the accounts of the Company, together with the accounts
of Imtek Corporation, Imtek Services Corporation, Imtek Acquisition
Corporation and Imtek Capital Corp., all wholly-owned subsidiaries of
the Company. All inter-company transactions have been eliminated in
consolidation.
The accompanying consolidated balance sheets as of March 31, 1999 and
June 30, 1998, consolidated statements of earnings for the quarter
ended and nine months ended March 31, 1999, the statement of
shareholders' equity for the period ended March 31, 1999, and the
consolidated statement of cash flows for the nine months ended
March 31, 1999 and 1998 are unaudited. In the opinion of management,
all adjustments, consisting of normal recurring accruals, necessary
for a fair presentation of the results of operations for the interim
periods presented have been reflected in the accompanying consolidated
financial statements. The result of operations for interim periods
presented herein are not necessarily indicative of the results which
may be expected for the entire fiscal year.
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<PAGE>
NOTE B - RESTRICTED CASH AND CUSTOMER ESCROW ACCOUNTS
The company's merchant banking subsidiary attempts to pre-fund certain
viaticated life insurance purchases with funds received from third party
purchasers. Funds are collected in an escrow account and released to the Company
upon the sale of the policies.
NOTE C - Dependence on Major Vendor
The Company's merchant banking segment purchased viaticated insurance
policies primarily from one broker. For the quarter ended March 31, 1999, the
Company purchased $9,846,097 in policies from this broker ($22,016,937 for
the nine months ended March 31, 1999), representing 86% of the policies
purchased by the Company during the quarter (62% for the nine months ended
March 31, 1999).
NOTE D - Segment information
<TABLE>
<CAPTION>
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Qtr ended Qtr ended Nine month Nine Months
March 31, '99 March 31, '98 March 31, '99 March 31, '98
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Sales to unaffiliated customers
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Office Solutions $ 6,479,657 $ 2,026,529 $18,014,189 $ 4,867,602
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Merchant Banking 11,437,390 7,912,213 35,535,143 12,889,107
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Specialty Financial Services 41,343 -- 41,343
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
$17,958,390 $ 9,938,742 $53,590,675 $ 17,756,709
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Operating Income (Loss)
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Office Solutions $ (421,210) $ (214,413) $ (724,466) $ (168,054)
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Merchant Banking 755,529 827,807 3,031,038 1,310,791
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Specialty Financial Services (25,886) -- (25,886) --
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
$ 308,433 $ 613,394 $ 2,280,686 $ 1,142,737
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Assets
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Office Solutions $17,034,337 $ 2,842,249 $ -- $ --
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Merchant Banking 5,084,921 5,077,467 -- --
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Specialty Financial Services 132,580 -- -- --
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
$22,251,838 $7,919,716 $ -- $ --
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Capital Expenditures
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Office Solutions $ 117,560 $1,318,306 $ 1,616,788 $ 1,419,859
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Merchant Banking 95,981 -- 97,566 204,602
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Specialty Financial Services -- -- -- --
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
$ 213,541 $ 1,318,306 $ 1,714,354 $ 1,624,461
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Depreciation and Amount
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Office Solutions $ 192,000 $ 28,806 $ 496,633 $ 34,021
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Merchant Banking 12,000 8,106 26,664 15,248
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
Specialty Financing Services -- -- -- --
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
$ 204,000 $ 36,912 $ 523,297 $ 49,269
--------------------- --------------------- -------------------- --------------------
- ----------------------------------- --------------------- --------------------- -------------------- --------------------
</TABLE>
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
BACKGROUND
Imtek Office Solutions, Inc., (the "Company"), as previously
reported, effectively commenced operations on April 22, 1997. Prior to April
22, 1997, the Company, and its predecessor, was a development stage company
with no significant operations. The Company, for the fiscal year ended as of
September 30, 1997, was primarily engaged in the wholesale and retail sale of
copiers and facsimile equipment, servicing of office equipment, provision of
commercial printing and duplicating services and, to a lesser extent, the
retail sale of office supplies. Effective October 1, 1997, the Company
commenced operation of its merchant banking business, primarily through
viatical settlements (the purchase and resale of life insurance policies of
terminally ill individuals). Additionally, during the third quarter ending
March 31, 1999, the Company created a third segment. This third segment,
Specialty Finance, was formerly a component of the Merchant Banking segment,
with no significant operations. The Company operates principally in the
Mid-Atlantic region, consisting of Baltimore, Maryland, Philadelphia,
Pennsylvania, Washington, D.C., Richmond, Virginia, the Tidewater area of
Southeastern Virginia and the metropolitan Atlanta, Georgia market.
The Company changed its fiscal year end from September 30 to June 30,
effective June 30, 1998 as previously reported on form 8-K of July 30, 1998,
which is incorporated by reference. Since the Company was in a start-up mode
during 1997 with limited activity during fiscal year ended September 30, 1997 (a
period of five months), and the transition period ended as of June 30, 1998 (a
period of 9 months), comparisons to prior year's results may not provide
meaningful analysis.
In prior periods, the Company effectively had two operating
segments. The first segment, representing the historical core business of the
Company, is the sale at retail and wholesale of office products, copier sales
and service, and commercial printing and copying services. This segment is
referred to as Office Solutions. The Office Solution segment, the Company's
original core component, continues the process of growth through acquisition.
The strategy consists principally of acquiring smaller office equipment
dealers located within specific geographic markets. The segment anticipates
acquiring additional entities which may provide opportunities for expansion
or enhancement of current products and services. Management can provide no
assurance that such acquisitions, if any, would provide such beneficial
services, products, or markets, however. Management continues in the belief
that adequate acquisition opportunities exist. Management anticipates that
acquisitions, if any, would be funded principally from issuance of capital
stock, external financing sources, and to lesser extent, internally generated
cash flow. The Company's future success with acquisitions generally depends
upon the timing and size of the acquisition, the ability to integrate the
acquired company into the Company's operation with a minimum of integration
costs, and the Company's ability to maintain and enhance its infrastructure
to accommodate the continued growth.
The second segment is referred to as Merchant Banking and consists
principally of viatical settlements. The second segment is referred to as
Merchant Banking. The Merchant Banking segment consists predominantly of the
provision of viatical settlement services, including the purchase and resale
of insurance policies of terminally ill individuals. This segment's business
consists of two distinct functions. The first is the purchase and resale of
policies. The second is the provision of document management and production
services for trustees engaged in the viatical settlement business. Currently,
the Company is exploring the modification of its business conduct such that
the purchase and subsequent sale of viatications may be discontinued. The
segment would likely continue the brokering of viatications, as well as the
document management services. In the event that management adopts this
change, it is expected that gross revenue would decrease significantly.
Management does not however, expect to experience a significant decline in
the segments' operating income as a result of the contemplated modification.
The Merchant Banking segment effectively commenced operations during the
second quarter of the prior year and thus comparisons to the prior year may
not provide meaningful analysis. Presently,
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<PAGE>
the Merchant Banking segment markets its product principally through a
network of brokers, primarily insurance agents, which the segment has
established over the past year. The Company also is currently investigating
several marketing alternatives, including offering viaticated insurance
policies as a "securitized" product. If the Company is successful in offering
these additional "securitized" products, management believes that the segment
has the potential to experience a substantial increase in volume. While there
can be no assurance that this substantial increase in volume can be achieved,
offering these additional securitized products may allow licensed security
brokers the opportunity to begin selling this product, thus expanding the
Segment's sales network. Management intends to invest up to $150,000 during
the remainder of the current year in designing these products and introducing
them into the market.
The Company believes, however, that its viatical settlement
contracts are not securities subject to regulation under current state
securities laws. The Company is aware, however, that several states are
attempting to regulate, or to determine if the viatical settlement business
or parts of the viatical settlement process should be regulated under state
securities or "blue sky" laws or such states insurance laws or regulations.
The Company presently believes that the conduct of its viatical
business may not be subject to regulation under state securities or insurance
laws or regulations, as such laws and regulations are now written. The
Company can provide no assurance, however, that a state regulatory body
looking into this matter in the future will agree with the Company's position
in this regard or that if challenged, the Company will prevail in its
position. Regulation by the states could materially increase regulatory
compliance costs, disrupt business and potentially have a material adverse
effect on the Company's viatical business. Even if the Company is correct in
its position that the viatical business is not currently regulated under
state securities or insurance laws and regulations, there can be no assurance
that such laws will not be amended by the states to regulate the Company's
viatical business in future.
The Company has received inquiries from several states securities
regulators requesting information to assist them in determining whether
viaticated insurance policies or parts of the viatical settlement process should
be, or is subject to be, regulated under various state securities and insurance
laws and regulations.
Moreover, the Kansas Securities Commissioner has issued a cease and
desist order finding that the Company's viatical settlement contracts are
securities within the meaning of the Kansas Securities Act. The Company has
ceased all offers and sales of all viatical settlement contracts within the
State of Kansas. The Company believes that the determination made by the
Securities Commissioner is incorrect and plans to request a hearing to
contest the determination. There have been less than 10 purchases of viatical
settlement contracts by Kansas residents, aggregating approximately $193,000.
If the Company is unsuccessful in contesting the cease and desist order, the
Company will be precluded from offering and selling viatical settlement
contracts in Kansas unless it complies with all applicable provisions of the
Kansas Securities Act and the regulations promulgated thereunder.
Additionally, purchasers of the Company's viatical
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<PAGE>
settlement contracts who are Kansas residents will be entitled to rescind their
purchase and receive a refund of the purchase price plus interest at the
statutory rate from the date of sale.
The third segment, Specialty Finance, consists principally of an
office equipment leasing facility. This segment essentially acts as a
intermediary in financing and leasing arrangements of office equipment and
copiers. Previously, the segment's activities were included with the Merchant
Banking segment. Because prior activity was immaterial, prior periods have
not been restated to reflect the change.
MERCHANT BANKING SEGMENT
As previously reported, the Merchant Banking Segment did not commence
operations until October 1997. Thus, there is no meaningful comparison to the
prior year nine month period.
During the third quarter and for the nine month period ended as of
March 31, 1999, the segment accounted for 63.7 and 66.3 percent of the
Company's consolidated revenues, respectively. Moreover, during the third
quarter segment revenue increased by approximately $1.4 Million or 14.2% as
compared to the prior quarter. As compared to the comparable quarter of the
prior year, segment revenue increased by approximately $3.5 Million, or
44.6%. The increase during the current quarter as compared to the prior
quarter relates principally to the segment's decision to increase agent and
broker commissions. Previously, the segment's commission structure was
moderately below market rates. Management relied on its quality of service to
compensate for the lower commission structure. However, as the segment's
market matured, with increasing competition, this philosophy has yielded
decreasing results. Thus, by raising the commission structure to match market
rates, while continuing to offer superior service, the segment experienced
revenue growth.
As compared to the comparable quarter of the prior year, revenue growth
was principally in response to the segment's investment in its market network.
Additional contributing factors include the superior service provided to
customers, and general market growth.
Previously, the segment reported that it anticipated offering the
additional service of financial brokering of office equipment sales and
leases. The segment expected to broker this financing through a subsidiary
corporation, Imtek Capital Corporation. Imtek Capital Corporation has entered
into an agreement with a financial services company whereby it may facilitate
financing arrangements. As previously discussed, this activity has been
carved out of the Merchant Banking Segment and placed into its own segment.
Prior to the third quarter the specialty financing activities were
immaterial, and thus no restatement of prior reported financial statements is
necessary.
The segment's gross margin during the third quarter declined to 23.9%
from 27.3% in the prior quarter. Although the product mix remained consistent
between the two periods, as discussed above, this decline is principally in
response to the increase in commissions paid during the quarter.
-12-
<PAGE>
As compared to the comparable quarter of the preceding year, gross
profit and correspondingly gross margin increased to 23.9% as compared to 13.5%,
respectively. This increase is principally in response to the product mix, with
the current quarter viatical term lengthening.
As previously reported, the Segment's profit margin, within a relevant
range, generally varies by the expected term of viatication. As the viatication
period lengthens, the corresponding profit margin generally increases.
Viatication periods generally run in six month intervals, with a minimum of six
months and a normal maximum of 48 months. These viatication periods are deemed
to be the product mix.
Moreover, as discussed above, during the quarter the segment
increased the commission structure paid to agents and brokers. The third
quarter did not reflect the entire impact of the change. Management
anticipates that the fourth quarter and periods thereafter will include the
full affect of this change and management anticipates a proportionate decline
in the segment's operating margin.
Selling, general and administrative expense decreased by approximately
$58 thousand in the third quarter of the current year as compared to the prior
quarter. With the revenue growth, these expenses, as a percentage of revenue
declined by approximately 3.1%. This decline relates principally to the previous
quarter's expenses including the annual audit fee and other professional fees,
which were non-recurring during the third quarter.
Moreover, as compared to the comparable quarter of the preceding
year, selling, general and administrative expense have significantly
increased. During the third quarter of the prior year these expenses
represented slightly more than 6% of gross revenue. This increase is
principally in response to the previously reported acquisition of a specialty
financial services marketing group with related increases in payroll and
fringe benefit costs. Along with directly related expenses of the
acquisition, such indirect costs as advertising, travel, entertainment,
postage, and such have also experienced increases. Finally, in concert with
revenue growth, the segment has experienced proportional expense increase in
such items as professional fees for legal and accounting, as well as other
overhead items.
Income from operations increased by $58 thousand over the prior
quarter. As compared to the comparable quarter of the prior year, income
increased by $137 thousand. However, as a percentage of revenue the current
year's third quarter produced a decline as compared to the prior quarter and
the comparable quarter of the prior year. Management, as previously reported,
believes that as the industry matures, with increased competition, the
operating income margin may experience additional contraction.
SPECIALTY FINANCE SEGMENT
As previously discussed, the Company during the third quarter created a
third segment called Specialty Finance. This segment, with no previous
operations, consists principally of a
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<PAGE>
wholly owned subsidiary, Imtek Capital Corporation and provides intermediary
services in brokering financing and leasing arrangements of office equipment.
During the third quarter, the segment's first quarter of operations, the
segment generated $41 thousand of revenue with a resultant loss from
operations of approximately $26 thousand. Management anticipates this segment
to report operating profits in the first quarter of the subsequent fiscal
year. Continued start-up expense and expansion of the segment's
infrastructure during the fourth quarter of the current year are anticipated
to consume generated gross profit. Due to the segment's commencement of
operation during the quarter, there are no comparisons to the previous parter
of the comparable quarter of the prior year.
OFFICE SOLUTIONS SEGMENT
The Office Solutions segment generated gross revenue of $6,479,600 and
$18,014,200 for the quarter and nine month period ended as of March 31, 1999
respectively as compared to $2,026,500 and $4,867,600 for the comparable periods
of the prior year. As compared to the prior quarter, gross revenue increased by
$530,900 or 2.95%. This increase is principally in response to previously
acquired companies becoming fully integrated within the Company and to a lesser
extent, the Company's continuing marketing efforts. As compared to the
comparable quarter of the prior year, revenue increased by $4.26 million. This
increase is principally in response to acquisitions.
Revenue for the quarter and nine month period as compared to the
comparable periods of the prior year on a same store basis was relatively flat.
The lack of same store revenue growth is principally in response to market
conditions whereby the segment has been restricted in its efforts to raise
prices.
As previously reported, management has implemented a strategy of
revenue growth through acquisitions. The strategy consists principally of
acquiring smaller office equipment dealers located within specific geographic
markets. Management believes that these acquired companies, with similar
products and services, will benefit, after a reasonable assimilation period,
from the Company's centralized management, system of internal control,
additional financial resources, efficiencies associated with certain economics
of scale and expanded marketing resources. Management can provide no assurance
that any such benefits will be realized.
The segment generated gross profit for the quarter ended as of March
31, 1999 of approximately $2,088,500 or 32.2% of revenues, as compared to
$1,979,900 or 33.3% of revenue for the prior quarter. This decrease in margin
percentage is in response to one division which has a governmental contract
that requires lower gross margins. Although this contract will have a
negative affect on gross profit percentages, the expected revenue growth in
future periods should provide for greater overhead coverage such that other
sales will provide a greater contribution to the segment's operating income.
As compared to the quarter ended as of March 31 for the prior year, the
segment substantially increased the gross profit. This increase, in excess of $1
million, is principally in response to acquisitions. However, the gross margin
declined from 51% to 32.2% compared to the same
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<PAGE>
quarter of the prior year. This decline is principally the result of several
divisions in the prior year completing several large contracts which contained
above average profit margins.
Selling, general and administrative expenses increased by $195,600
or 9.2% as compared to the prior quarter. However, as a percent of sales,
these expenses remained relatively constant at 36%. Compared to the
comparable quarter of the prior year, selling, general and administrative
expenses increased by $1,298,600 or in excess of 127%. This increase is
principally due to acquisitions. The segment's acquisition strategy, in
conjunction with internally generated growth, has performed as expected in
that selling and administrative expenses, as a percentage of revenue,
dramatically declined during the quarter as compared to the comparable
quarter of the preceding year, in which these expenses were in excess of 50%
of revenue.
Additionally, for the nine month period of the current year, as
compared to the prior year, selling and administrative expenses, although
increasing by $4.2 Million or 195.4%, represented significantly less as a
percentage of revenue, declining from 44.4% for the nine month period of the
prior year to 35.4% for the comparable period of the current year. Again, the
effective acquisition policy is the principal reason for this positive trend.
During the fourth quarter management anticipates the design and
implementation of a cost containment program within the segment. This program
is intended to eliminate duplication of efforts, reduction of staffing
levels, and otherwise review and reduce unnecessary operating expenses.
Management anticipates sharing significant cost savings on an annual basis,
from reducing the segment's overhead structure.
Moreover, management is contemplating a modification to its financial
system structure such that the segment's financial system will be decentralized
to a hub basis. The intended product of these modifications is to provide
operational management more timely and specific financial information from which
operational management decisions can be based. With the intended modifications
to the financial system, management believes that the system of internal
controls will be strengthened and operational management will be provided better
tools from which to base decisions and thus should improve operational
efficiencies. Management can provide no assurance that these two programs will
produce their intended results.
Although the segment experienced positive improvement in revenue
growth, operating margin declines and continued dollar increases in selling
and administrative expenses, the segment continues to experience losses from
operations. The segment produced a loss from operations of $421,200 for the
quarter, as compared to a loss of $142,200 for the prior quarter. For the
comparable quarter of the prior year the segment generated a slight operating
profit of $14,400. As previously discussed this profit was principally due to
one division's completion of a large project that contained above segment
norms for gross profit. For the nine month period, as compared to the prior
year, the segment produced a loss from operations of $724,500 and $168,100,
respectively. As previously discussed, management is addressing this issue
with both cost containment actions and expansion of current operations
management with improved tools and refined marketing efforts. Moreover, as
previous acquisitions continue the assimilation process, revenue, and
corresponding profits, should show signs of improvement in subsequent
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<PAGE>
quarters.
FINANCIAL CONDITION AND LIQUIDITY
Office Solutions Segment
Total assets for the Office Solution segment increased by $1,431,5000
or 9.35% as compared to the prior quarter and by $9,011,900 as compared to the
prior fiscal year end.
Accounts receivable increased by approximately $680,000 for the
quarter as compared to the prior quarter. The increase relates principally to
material increases in revenue during the last month of the quarter, as well
as the latter part of February. The increase is also a significant reason for
the segment's decrease of $207,100 in cash during the quarter.
Accounts receivable, as compared to the previous year-end also showed
substantial increase. This increase, in addition to the previously discussed
increase, is principally in response to acquisitions during the year.
Inventories also increased during the current quarter as compared to
the prior quarter. This increase correlates with revenue growth during the
period. Management continues in its efforts to balance the inventory level with
near term customer demands and management's desire to provide the highest
level of service, which is facilitated by controlling stock-outs. As compared to
year-end, inventory levels have generally followed revenue growth.
Prepaid assets during the quarter, as compared to the prior quarter
increased in excess of $100,000, or approximately 30%. This increase was in
response to inventory purchases and payment at quarter-end but which was not
received and thus not included in inventory at quarter-end. The prepayment of
this inventory was made to acquire stock items at the largest discount
possible, and thus buttress the gross margin in the subsequent quarter.
Corresponding to inventory and accounts receivable increases, the
segment likewise experienced an increase in accounts payable. For the
nine-month period, accounts payable also increased in response to
acquisitions.
Deferred revenue decreased to $1.4 million from $1.85 million in the
previous quarter. This decline relates principally to two factors. The first
is the trend of customers converting maintenance contracts from an annual
contract to a month-to-month contract. The second factor relates to
seasonability. Larger customers, including governmental agencies, have
historically based expenditures upon budgetary cycles such that June and
December experience large increases as annual contracts are renewed.
Based upon the above, with other less significant fluctuations, the
segment experienced a slight decline in the current ratio as compared to the
prior quarter, decreasing from 1.94 to 1.81. The ratio for the quarter,
however, remains an improvement over the prior year ratio of 1.77.
-16-
<PAGE>
Because the segment did not complete an acquisition during the
quarter, it experienced minimal fluctuation in both non-current assets and
liabilities. Management continues to anticipate future acquisitions, which
would be funded from external sources, issuance of additional capital and, to
a lesser extent, from internally generated cash flow.
Merchant Banking Segment
Total assets for the Merchant Banking segment increased by
$1,652,600 as compared to the prior quarter. As compared to the prior year
end, total assets decreased by approximately $2.1 million. This decrease, as
previously reported, relates principally to a substantial decrease in
customer escrowed cash.
Operating cash for the segment decreased by approximately $1 million
during the quarter and by $100,000 for the nine-month period.
In concert with the consumption of cash during the quarter, accounts
receivable increased by approximately $422,500 as compared to the prior
quarter. This increase is in response to viatications which were completed at
the end of the quarter but for which the segment had not received payment.
These viatications were related to retirement assets by which funding is
received by the retirement account trustee and from which such funding may
not be completed for a period of 30 to 45 days. Settlements of these
viatications were completed in April, 1999.
Corresponding to the increase in accounts receivable, prepaid expenses
also increased. These prepaid expenses consisted principally of commissions paid
to agents in connection with the prefunding of the insurance policies sale. The
segment recognizes commission expense upon policy sale.
During the quarter, escrowed cash (funds received from third party
purchasers prior to settlement), increased by approximately $1,800,000 over
the previous quarter. For the nine-month period, escrowed cash declined by
approximately $2.2 million. These fluctuations are principally in response to
the timing of settlements and the subsequent receipt of funds such that
significant viatications during the last several days may result in increases
to escrow cash if funding has occurred from third party purchasers prior to
the period end.
As the segment continues to grow and expand, expenditures for property,
plant and equipment will be required. During the quarter the segment expanded
approximately $96,000 and for the nine-month period approximately $98,000. These
expenditures consisted principally of office furniture and equipment.
Specialty Finance Segment
As previously discussed, the Specialty Finance segment came into
existence during the quarter. Thus, there are no meaningful comparisons to
either the prior quarter or the nine-month period. This segment was primarily
financed by a $150,000 pre-funding arrangement that the Company entered into
with a national leasing entity. Total assets of this segment at March 31, 1999
were $132,600 consisting primarily of cash and approximately $8,000 in accounts
receivable.
YEAR 2000 STATEMENT
The year 2000 (Y2K) issue is the result of computer programs using a
two-digit year, such that the computer system may interpret the year 2000 as
1900. Should this occur, a system-wide failure of computer systems would be
eminent and could lead to company-wide disruptions. The cost of such
company-wide disruptions could have a material adverse effect on the
Company's financial condition and results of operations.
As previously reported, the Company has implemented its three phase
plan to address its Y2K issue and has principally completed both phase 1 and
2 of its plan. A number of applications have been identified as either Y2K
compliant or that the third party vendor has provided the Company with
assurance that the application will be Y2K compliant.
Management does not anticipate significant additional expense in
future periods associated with any known Y2K issue.
-17-
<PAGE>
PART II. OTHER INFORMATION.
Item 1. Legal Proceedings
In November, 1998 the Company settled a $500,000 lawsuit (which was
reported in Item 3 of the Company's annual report on Form 10 K for the fiscal
year ended June 30, 1998) which alleged certain copyright infringements and
breach of contract damages. Settlement terms called for a payment of $60,000
made in December,1998 and subsequent semi-annual installments made through
December 2000, totaling $82,500.
On April 16, 1999, the Kansas Securities Commissioner issued a cease
and desist order against Imtek Funding Corporation d/b/a Beneficial
Assistance, finding that the Company's viatical settlement contracts are
securities within the meaning of the Kansas Securities Act. In response, the
Company has ceased all offers and sales of all viatical settlement contracts
within the State of Kansas. The Company believes that the determination made
by the Securities Commissioner is incorrect and plans to request a hearing to
contest the determination. The Company has sold less than 10 viatical
settlement contracts to Kansas residents, aggregating approximately $193,000.
If the Company is unsuccessful in contesting the cease and desist order, the
Company will be precluded from offering and selling viatical settlement
contracts in the State of Kansas unless it complies with all applicable
provisions of the Kansas Securities Act and the regulations promulgated
thereunder. Additionally, purchasers of the Company's viatical settlement
contracts who were sold viatical settlement contracts in violation of
applicable Kansas law may become entitled to rescind their purchases and
receive a refund of the purchase price plus interest at the statutory rate
from the date of sale.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit:
27 Financial Data Schedule
(b) Reports on Form 8-K:
None
-18-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
IMTEK OFFICE SOLUTIONS, INC.
By: /s/Edwin C. Hirsch
--------------------------
Edwin C. Hirsch, President
And Chief Executive Officer
By: /s/ Brad Thompson
--------------------------
Financial Officer
Dated: May 17, 1999
-19-
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